Question #230590

Expert's answer

**Solution:**

a.). Financial Leverage ="\\frac{Total \\; Debt}{Shareholders\\; Equity}"

Total Debt = 1000,000

Shareholders Equity = Equity shares + Reserves and Surplus = 1,600,000 + 1,500,000 = 3,100,000

Financial Leverage = "\\frac{1,000,000}{3,100,000} = 0.32"

**Financial Leverage = 0.32**

Operating Leverage = "\\frac{Fixed \\; Costs}{Total\\; Costs}"

Fixed Costs = 60 lakhs = 0.60 crores

Variable Costs = "10\\%\\times 2" crores = 0.20 crores

Total Costs = FC + VC = 0.60 + 0.20 = 0.80 crores

Operating Leverage = "\\frac{0.60}{0.80} = 0.75"

**Operating Leverage = 0.75**

Combined Leverage = Operating Leverage x Financial Leverage = 0.75 "\\times" 0.32 = 0.24

**Combined Leverage = 0.24**

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